Illinois becomes 2nd in country to allow electricity auctions

Wholesale electricity auctions approved this week by the Illinois Commerce Commission will make Illinois only the second state in the country to use the process.

New Jersey conducted its first auction four years ago; observers there dispute the program's effectiveness.

The goal of auctioning electricity was to help create a competitive market as the Garden State moved toward the lifting of price caps that had been imposed in 1999.

Proponents say the Illinois plan will create a wholesale market that will help control the inevitable increase in costs when a state-imposed 10-year price freeze is lifted at the end of this year.

Opponents of the plan, sought by Commonwealth Edison, have included some of the state's highest-ranking officials, including Gov. Rod Blagojevich and Attorney General Lisa Madigan, both Democrats.

"This order ignores mandatory consumer protection provisions under Illinois law and adopts a method of pricing electricity that is clearly contrary to the Public Utilities Act," Madigan said.

The purchase method, known as a reverse auction, differs from a traditional auction in that there is one buyer and several potential sellers. The buyer specifies its need and the wholesalers make bids that gradually step down until the buyer accepts the bid. The process is supposed to increase competition and guarantee the lowest possible price for individual customers.

While the reverse auction plan has been approved by the ICC, the delivery service rate case is still pending. ComEd has requested a 6 percent delivery rate increase that must be sanctioned by the ICC, according to ComEd spokeswoman Judy Rader.

Rader said that the increasing cost of electricity generation and procurement, coupled with the increased delivery rate, could result in a 15 percent to 20 percent increase in cost for residential customers.

Madigan said the new auction process will cause "huge, unfair and unnecessary rate increases for ComEd and Ameren customers who will end up paying an extra $1 billion per year for the same electric service that they have today."

The Illinois reverse auction will be designed and overseen by the same New York consultant, Chantale LaCasse, a senior vice president of NERA Economic Consulting, who designed the New Jersey electricity auctions.

Observers of the New Jersey plan differ starkly in their assessments of the program's impact on prices and competition.

Ken Welch, an analyst for the New Jersey Board of Public Utilities, said the auction process has helped hold down prices despite rising natural gas costs.

"When you look at how the price of wholesale natural gas has gone up in recent years and you compare it to where our energy prices have been in New Jersey, I think we've done a pretty good job of eliminating the possible increase," Welch said.

Suzanne Leta, an advocate for the New Jersey Public Interest Research Group, said electrical rates for New Jersey residents have continued to rise and competition has not increased.

"Unfortunately our marketplace is not that competitive, and it really hasn't gotten that much more competitive," she said. "If you look at the history since the auctions started, it hasn't really done anything to keep rates low," she added.

The Citizens Utility Board, an Illinois consumer advocate group, has campaigned against the now-approved plan. Robert Kelter, director of litigation for CUB, said his group intends to challenge the plan in the appellate court, as well as seek legislative solutions in Springfield.

"ComEd has an obligation to serve its customers at least cost. It has not demonstrated that this auction meets that standard," he said.

ComEd Chairman and Chief Executive Officer Frank Clark had said before the ICC's vote that ComEd would consider filing for bankruptcy if the reverse auction plan and delivery rate increases were not passed.

Moody's Investors Service, a market research firm, downgraded ComEd's bond rating on December 15. More conservative assessments of the utility's future earnings and uncertainty about the ICC's decision contributed to the rating change.

"It increases the level of certainty around our ability to move forward. Predictability and certainty is a good thing in terms of our credit ratings and our financial stability, and we see it as a step in the right direction," Rader said.

Madigan said she intends to fight the order in the appellate courts. A previous effort to block the plan was dismissed last week by a Cook County Circuit Court judge.